CHAPTER 16 Developing Pricing Strategies and Programs Copyright

LEARNING OBJECTIVES 1. 2. 3. 4. 5. How do consumers process and evaluate prices?

UNDERSTANDING PRICING • Pricing in a digital world ü Get instant vendor price comparisons

UNDERSTANDING PRICING • A changing pricing environment – Sharing economy – Bartering – Renting

UNDERSTANDING PRICING • How companies price – Small companies: boss – Large companies: division/product

CONSUMER PSYCHOLOGY AND PRICING Reference prices Price-quality inferences Price endings Copyright © 2016 Pearson

REFERENCE PRICES Copyright © 2016 Pearson Education Ltd. 16 -7

SETTING THE PRICE Copyright © 2016 Pearson Education Ltd. 16 -8

STEP 1: SELECTING THE PRICING OBJECTIVE Survival Maximum current profit Maximum market share Other

STEP 2: DETERMINING DEMAND • Price sensitivity • Estimating demand curves – Surveys, price

FIGURE 16. 1 INELASTIC AND ELASTIC DEMAND Copyright © 2016 Pearson Education Ltd. 16

PRICE SENSITIVITY Copyright © 2016 Pearson Education Ltd. 16 -12

STEP 3: ESTIMATING COSTS • Types of costs and levels of production – Fixed

STEP 3: ESTIMATING COSTS • Accumulated production – Experience/learning curve Copyright © 2016 Pearson

STEP 3: ESTIMATING COSTS • Target costing – Price less desired profit margin Copyright

STEP 4: ANALYZING COMPETITORS’ PRICES • Firm must take competitors’ costs, prices, & reactions

STEP 5: SELECTING A PRICING METHOD • Figure 16. 4: three major considerations in

STEP 5: SELECTING A PRICING METHOD • Markup pricing – Add a standard markup

STEP 5: SELECTING A PRICING METHOD • Target-return pricing – Price that yields its

FIGURE 16. 5 BREAK-EVEN FOR TARGET-RETURN PRICE Copyright © 2016 Pearson Education Ltd. 16

STEP 5: SELECTING A PRICING METHOD • Perceived-value pricing – Based on buyer’s image

STEP 5: SELECTING A PRICING METHOD • Value pricing • EDLP – High-low pricing

STEP 5: SELECTING A PRICING METHOD • Auction-type pricing English (ascending) Dutch (descending) Sealed-bid

STEP 6: SELECTING THE FINAL PRICE • Additional factors to select final price: ü

ADAPTING THE PRICE • Geographical pricing – Barter – Compensation deal – Buyback arrangement

ADAPTING THE PRICE • Price discounts and allowances Copyright © 2016 Pearson Education Ltd.

ADAPTING THE PRICE • Promotional pricing: • Loss-leader pricing • Special event pricing •

ADAPTING THE PRICE • Price discrimination Customersegment pricing Product-form pricing Image pricing Time pricing

ADAPTING THE PRICE • Price discrimination – Yield pricing Copyright © 2016 Pearson Education

INITIATING AND RESPONDING TO PRICE CHANGES • Initiating price cuts – Excess plant capacity

INITIATING AND RESPONDING TO PRICE CHANGES • Initiating price increases ü Delayed quotation pricing

INITIATING PRICE INCREASES Copyright © 2016 Pearson Education Ltd. 16 -32

INITIATING AND RESPONDING TO PRICE CHANGES • Anticipating competitive responses • Responding to competitors’

Copyright © 2016 Pearson Education Ltd. 16 -34

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LEARNING OBJECTIVES 1. 2. 3. 4. 5. How do consumers process and evaluate prices? How should a company set prices initially for products or services? How should a company adapt prices to meet varying circumstances and opportunities? When and how should a company initiate a price change? How should a company respond to a competitor’s price change? Copyright © 2016 Pearson Education Ltd. 16 -2

UNDERSTANDING PRICING • Pricing in a digital world ü Get instant vendor price comparisons ü Check prices at the point of purchase ü Name your price and have it met ü Get products free ü Monitor customer behavior & tailor offers ü Give customers access to special prices ü Negotiate prices online or even in person Copyright © 2016 Pearson Education Ltd. 16 -3

UNDERSTANDING PRICING • How companies price – Small companies: boss – Large companies: division/product line managers • How companies should price – Understanding of consumer pricing psychology – a systematic approach to setting, adapting, and changing prices Copyright © 2016 Pearson Education Ltd. 16 -5

STEP 1: SELECTING THE PRICING OBJECTIVE Survival Maximum current profit Maximum market share Other objectives Product-quality leadership Maximum market skimming Copyright © 2016 Pearson Education Ltd. 16 -9

STEP 2: DETERMINING DEMAND • Price sensitivity • Estimating demand curves – Surveys, price experiments, & statistical analysis • Price elasticity of demand Copyright © 2016 Pearson Education Ltd. 16 -10

STEP 5: SELECTING A PRICING METHOD • Figure 16. 4: three major considerations in price – Costs = price floor – Competitors’ prices = orienting point – Customers’ assessment of unique features = price ceiling Copyright © 2016 Pearson Education Ltd. 16 -17

STEP 5: SELECTING A PRICING METHOD • Perceived-value pricing – Based on buyer’s image of product, channel deliverables, warranty quality, customer support, and softer attributes (e. g. , reputation) Copyright © 2016 Pearson Education Ltd. 16 -21

STEP 6: SELECTING THE FINAL PRICE • Additional factors to select final price: ü Impact of other marketing activities ü Company pricing policies ü Gain-and-risk-sharing pricing ü Impact of price on other parties Copyright © 2016 Pearson Education Ltd. 16 -24

ADAPTING THE PRICE • Promotional pricing: • Loss-leader pricing • Special event pricing • Special customer pricing • Cash rebates • Low-interest financing • Longer payment terms • Warranties/service contracts • Psychological discounting Copyright © 2016 Pearson Education Ltd. 16 -27

INITIATING AND RESPONDING TO PRICE CHANGES • Initiating price cuts – Excess plant capacity – Domination of market • Price-cutting traps – Price concessions – Low-quality – Fragile market share – Shallow pockets – Price war Copyright © 2016 Pearson Education Ltd. 16 -30

INITIATING AND RESPONDING TO PRICE CHANGES • Initiating price increases ü Delayed quotation pricing ü Escalator clauses ü Unbundling ü Reduction of discounts Copyright © 2016 Pearson Education Ltd. 16 -31